A Cosmetics Manufacturer & Distributor was having significant financial problems. The Company projected a loss of $1 million for the current year and also incurred a loss of $1.1 million the prior year. The Company was in violation of several covenants with its current lender which gave the Company three months to move to a new lender.
The Company was introduced to a few Non-Traditional Lenders by one of its Trusted Advisors. The Company was turned down by all except one Factor which provided the Company with a term sheet. The Company calculated the effective interest rate to be 39%, which was 9 times higher than its current interest rate. The other problem was that there was not enough liquidity provided by this prospective lender as they were unable to lend the Company any money against its inventory.
The Company's inventory was composed of hundreds of SKU's of cosmetic components that needed to be assembled together. Some items that could spoil due to shelf life (ie. Lipstick, etc.) would still have to be poured into lipstick holders to create a finished product. To make the situation even more challenging, the Company did not maintain an accurate perpetual inventory system.
The Company asked its Trusted Advisor for additional referrals. The Company was then introduced to Asset Enhancement Solutions, LLC for assistance.
Asset Enhancement Solutions, LLC ("AES") spent a significant amount of time learning about the Company and its business. The Company's balance sheet showed an inventory value of $7.5 million which in theory could be used as collateral for a loan. When AES requested reports quantifying this inventory value, it was advised that the value of "sellable" non-obsolete inventory was only $3 million, an overstatement of $4.5 million. AES advised the Company that it might be in their best interest to write-off the $4.5 million of obsolete inventory in the current year or take a prior period adjustment to the prior year. As the Company lost over a million dollars two years in a row, its options for the type of lender that would finance its business was very limited and whether the Company projected a loss of $1 million or $5.5 million, it would probably end up with the same type of lender.
The Company agreed to write-off this obsolete inventory and clean-up the rest of its balance sheet. While analyzing its accounts receivable the Company decided to write-off $300,000 in old receivables that probably would never be collected. AES advised the Company that after these write-off's, the Company would be in a better position to report profits in the future and would not have to worry about taking future charges against earnings for assets with no value. AES suggested that the Company run this concept by their CPA firm before they took any action. The Company's CPA agreed with this approach.
AES was successful in arranging financing with a lender that provided the Company with an initial advance on inventory of $250,000. This was the only lender willing to provide a loan against inventory and provided the Company with an additional $250,000 that it desperately needed. As the lender gained experience with the Company and the perpetual inventory system became operational and accurate, the lender was willing to increase the inventory advance to a higher amount. The lender also advanced the Company funds against its receivables as part of this credit facility. The effective interest rate from this lender was only 12%, 75% less than the 39% rate the Company had been quoted by the first lender it spoke to.
The Company was very happy with the results achieved by Asset Enhancement Solutions, LLC.
Neil Seiden, 516-767-0100
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